Fall-Out from Dubai World (Update)

I´ll try rounding up the reaction in the market and the punditry to Dubai World´s threat of default.

Two clarifications.

First: Dubai World´s problem is being referred to as a sovereign debt problem, but as far as I can understand, it´s not. The Dubai government is the 100% owner of Dubai World, which is itself a holding company. But, as William Buiter points out in the Financial Times, the Dubai government has only limited liability, just like any other limited liability company.

It wouldn´t have to reach into its pockets to make good any obligation unmet by Dubai World or its subsidiary Nakheel.

Second. The debt crisis is being referred to as a Black Swan. Again, this is inaccurate. A black swan is an unexpected event that doesn´t fit (and in fact upends) the prevailing paradigm. This debt crisis has been on the horizon for a while. And the announcement of the standstill in payment was obviously calculated to roil the markets as little as possible – being made during the Thanksgiving holidays, when the market is partially shut, and also at the start of Eid which lasts until December 6.

Update: With those caveats, I was going to try and list the banks and sectors that might be affected…but I found that Bob Wenzel´s site  had already got a chart of Dubai World´s obligations to Nakheel Holdings from Izabella Kaminska at the Financial Times. You definitely need your coffee before you read this one.

However, the text below the chart, although just as abstruse, does make it clear that investors are not going to be able to get any blood out of the Dubai government.

“Investors should note, however, that the Government of Dubai does not guarantee any indebtedness or any other liability of Dubai World.”

Update: I should add here that while technically the government of Dubai is not responsible for the debt, it is implied everywhere that the safety of the debt derives from its backstopping by the government. The reaction of furious investors that Dubai would never be able to raise a penny again implies that default would taint the government and not simply the company.

Global Warming Crusade Hits Indigenous People

From Lew Rockwell:

“Survival Director Stephen Corry said today, ‘This report highlights ‘the most inconvenient truth of all’ – that the world’s tribal people, who have done the least to cause climate change and are most affected by it, are now having their rights violated and land devastated in the name of attempts to stop it. Hiding behind the global push to prevent climate change, governments and companies are mounting a massive land grab. As usual, where money and vast profits are at stake, the world’s indigenous people are being shamefully swept aside.’

Dubai Govt. Unable to Pay Debt

Via EconomicPolicyJournal:

“The government of Dubai is in major financial trouble.

The government late Wednesday said it would restructure Dubai World and announced a six-month “standstill” on repayments of the state-run wide-ranging conglomerate’s debt.

Government-owned Dubai World is a conglomerate with interests in real estate, ports and the leisure industry. The firm carries around $60 billion in liabilities. Credit agencies Moody’s Investors Service and Standard & Poor’s downgraded the debt of a range of government-related firms, including DP World, after the restructuring announcement.

The dollar amounts involved with Dubai are relatively small in this tranche (compared to the real estate debacle0, but this continues to indicate the shortage of dollars to support the current capital structure.

As one would expect, markets are reacting negatively. International stock markets are down across the board. The dollar is climbing.”

More at The Telegraph.

My Comment

We´ve been watching this story since we first read it via Peter Cooper, who has some other insightful comments on his blog, Arabian Money.net.

“The Private Equity World Middle East 2009 conference this week attracted a good crowd and many sponsors. However, the gloom and despondency among delegates and speakers is tangible. Why are these canny business operators so depressed?

Basically they do not believe in the recovery and see a double-dip in the global economy as stimulus packages are withdrawn. The current uptick has left businesses too highly priced and their owners overconfident in the opinion of private equity firms.”

Cooper has also noted that gold sales in Dubai have crashed, although with the increase in general investor interest, he thinks this won´t have a major impact on the world gold market. Cooper also thinks the China boom is driven mostly by government stimulus money and is very vulnerable to a collapse.

His opinion comes with regional expertise behind it, while mine is simply based on my sense that the 2008 crash was only a preview of coming attractions…but still, I´m wary of the move in gold.  My sense is that speculative money is pushing up the price and it could go down fast short-term. Long-term fundamentals remain good, of course.

Now, this is Thanksgiving and trading is thinner that usual, so market fluctuations do get amplified. Also, the move down in gold shouldn´t be taken out of context. It´s only to be expected, given its strong performance recently. But nonetheless, the strengthening of the dollar and the sell-off in the markets is significant.

Also significant is the fact that the Dubai government made the announcement after the local stock market had closed and on the eve of the Eid holiday that runs upto December 6.

Here are the numbers:

[(Note: the Asian markets sold off on Thursday, the other figures are opening figures in Europe and America.]

Update: there was some recovery in the markets by the close of Friday.

[Note also: First set of figures is from AP, Friday, November 27, 5:34 AM.]

Figures in brackets are from IBNLive.

Japanese Nikkei 225 down 3.2% (2.28%)

Australia down 2.9%

Shanghai down 2.4% (1.82%)

(India´s Sensex down 2.67%, Nifty down 2.8%)

Hang Seng (Hong Kong) down 4.8% (3.45%)

Kospi in S. Korea down 4.7% (4.01%)

Europe, down over 3% on Thursday, slid further:

FTSE 100 (UK) (down 3.2% on Thursday) 0.3%

DAX (Germ) (down 3.25% on Thursday) 0.4%

CAC-40 (France) (down 3.4% on Thursday) 0.6%

The Canadia market (TSX) dropped over 200 points.

On Wall Street, the Dow is down this morning by 2% and the S&P by 2.5%

Oil down by $4.17 to $73. 79 a barrel in Europe ($72.39 in Asia).

The dollar climbed back up from a 14 yr low of 84.81 yen to 86.33 and moved above parity to the Swissie.

Gold fell from a high above $1192 on Thursday to as low as $1136 (a move of $52 $56, which isn´t that big a deal for it, but nonetheless could be an indication of future downside volatility)

Looks like in a market sell-off, as before, the dollar gains..

This is why price-chasing is a danger.

Lysander Spooner on the Housing Bust

Lysander Spooner (“Poverty: Its illegal Causes and Legal Cures”):

“The principle, that a debt is obligatory only to the extent of the debtor’s means when the debt becomes due, would nearly, if not wholly, put an end to a class of contracts, that are immoral and fraudulent, in intent, if not in law, on the part of the creditors, and which ought never to be enforced against debtors. These contracts are of this kind. An old and experienced man takes advantage of the inexperience and the sanguine anticipations of a young man, to sell him property at enormous prices, giving him credit for the whole, or a part, but well knowing, from his own superior judgment and experience, that the young man will not at all realize his anticipations, or even realize enough from the property to cancel his liability. But he sells the property to him on the calculation that the latter will be able to pay at least the real value of the property; and that, as for the balance, he is a young man, he will be able to work it out; or his friends will pay it for him; or the possession of this property will enable him to get credit of others, and thus he will be enabled to pay this debt by throwing an equivalent amount of loss upon somebody else. Such contracts are plainly immoral and fraudulent, on the part of the creditor, both towards the debtor, and towards others*2-although their immorality and fraud are of a character not susceptible of being legally proved and defeated in particular cases. The only way of defeating them seems to be, to adopt the principle that no contract is binding beyond the limits of the debtor’s means.”

Royal Canadian Mint Gold Mystery Solved?

Accounting for missing gold at the Royal Canadian Mint:

Mint officials double-counted some gold bullion they sold, and also underestimated the shrinkage of the gold during processing.

The federal government had withheld bonuses for mint executives until the mystery was solved. It’s unclear whether those bonuses will still be paid out.

Junior Transport Minister Rob Merrifield, who’s responsible for the mint, called in the RCMP on June 9 after he learned that an audit would not “rectify the problem” of the missing gold. That’s about 10 weeks after the government first learned of the missiing gold.”

CTV.

Book Business Takes Another Hit..from Walmart

Rick Ackerman:

The giant retailer’s shot-across-the-bow – offering the top ten best-sellers for $10 — came just in time to devastate book stores during the holiday shopping season. Stores of every size will be vulnerable — from independents who have been savvy enough to survive competition from Amazon, to the largest vendors, including Borders, Barnes & Noble, Target, and even Amazon itself. No seller will make money at that price, not even publishers, but that is of little concern to Wal-Mart, which seeks only to demonstrate in as brutal a manner as possible that it will not be undersold. Nor can independent booksellers simply buy copies from Wal-Mart to resell, since $10 best sellers are being limited to just a few copies per buyer. The predictable result six to twelve months down the road is that many book stores both big and small will be closing, adding hugely to a retail vacancy rate that is already approaching depressionary levels.

Wal-Mart is all good cheer in promoting its everyday values, but there is no longer any denying that its primary goal is to drive all of its competitors into the ground. This strategy will no doubt be abetted by Chinese manufacturers eager to unload goods into a weak U.S. market at any cost. When Wal-Mart eventually succeeds at it, we can be certain that “everyday low prices” will be superseded in practice by prices reflecting whatever the traffic will bear. Wal-Mart has the reach, the naked ambition and the pricing power to bankrupt nearly any competitor in any business, from consumer electronics, to Halloween costumes, to funeral services, to pharmaceuticals, to lawn furniture. A decade ago, a grassroots movement to hold the line against Wal-Mart’s relentless expansion died after the retailer won some local skirmishes. Now the company is too big to oppose, a vital appendage of nearly every town in which it operates. America has paid a huge price for those everyday values.”

Speculation Drives Metal Prices

Geologist Brent Cook at Mineweb explores the speculative frenzy behind metal prices:

“Now I do not know if Paul’s [Van Eeden] thesis on gold is accurate or not: if it is it could still take many years to play out. Likewise, I do not know how or when the base metal prices will re-equilibrate to the reality of end demand-whatever that is. What is obvious is that gold and now base metals have become speculative investments that in addition to being bought as hedges against inflation and a falling US dollar are the latest get rich quick scheme. The end result is that absent the faith that metals and markets are all headed higher, we here at Exploration Insights are finding it difficult, although not impossible, to find value in junior mining and exploration companies.

Hot money on the other hand is not.

Over the past few months we have witnessed bought-deal equity financings for individual mid- to junior tier gold companies in the 10’s to 100’s of million dollars. These are being bought at nearly the absolute 52-week highs by funds that I know have not looked into the mining, metallurgical, social or political intricacies that make or break a mine. This fearless hot money jumping into the sector worries me. It always precedes a market bubble and correction: sometimes serious, sometimes temporary- sometimes by weeks, sometimes by years.

Adding to the absence of fear and proper due diligence in the market, my recent discussions with corporate financiers confirm that both large and mid-sized gold companies are being offered substantial unsolicited bought-deal financings-no questions asked. At the same time, some of the very same companies being offered the quick money are being hit with heavy selling when a fund manager becomes “concerned” because there has been no news for a couple of weeks or gold backed off $15.

Hand in hand with heavy fund demand for new metals investment ideas most of the major research firms have increased their commodity price assumptions to reflect the “new reality”. The primary advantage afforded by the commodity price revisions is that previously overvalued mining companies can instantly become “Buys”. Recall that the last major upward revisions from many of these same research firms came as the new reality of higher prices set in 2008.

The problem is that greed is driving the market and so any small hiccup or change in sentiment and the hot money tends to bolt. As last year taught us (remember last year?) when the fast money going in is the liquidity, there ain’t no liquidity getting out.

I remain cautious and somewhat concerned by what appears to be hot and fickle money jumping into a sector that is apparently taking its cue from pig farmers”.

Monbiot On the Real Global Warming Conspiracy

From George Monbiot, the real global warming conspiracy revealed:

“The capture of George W. Bush, a late convert to the cause of Communist World Government, was made possible only by the threatened release of footage filmed by a knight at Yale, showing the future president engaged in coitus with a Ford Mustang. Most ostensibly-capitalist governments remain apprised of where their real interests lie, though I note with disappointment that we have so far failed to eliminate Vaclav Klaus. Through the offices of compliant states, the Master’s third grand law has been accepted: world government will be established under the guise of controlling manmade emissions of greenhouse gases.

Keeping the scientific community in line remains a challenge. The national academies are becoming ever more querulous and greedy, and require higher pay-offs each year. The inexplicable events of the past month, in which the windows of all the leading scientific institutions were broken and a horse’s head turned up in James Hansen’s bed, appear to have staved off the immediate crisis, but for how much longer can we maintain the consensus?

Knights Carbonic, now that the hour of our triumph is at hand, I urge you all to redouble your efforts. In the name of the Master, go forth and terrify.

Professor Ernst Kattweizel, University of Redcar. 21st Grand Warden of the Temple of the Knights Carbonic.”

My Comment:

That´s from prominent environmentalist George Monbiot. I hope the emails were the work of a whistle-blower, as I think that will make the evidence that much harder to dismiss. But, even if they were, it´s quite easy for the global warming advocates to spin this whole business.

Leaked Emails May Be Whistle-Blower´s Work

CBS News via Lew Rockwell:

“One theory says that a malicious hacker slipped into East Anglia’s network and snatched thousands of documents. Another says that the files had already been assembled in response to a Freedom of Information request and, immediately after it was denied, a whistleblower decided to disclose them. (Lending credence to that theory is the fact that no personal e-mail messages unrelated to climate change appear to have been leaked.)”

Here´s hoping….

Secy of IMF – Siddharth Tiwari

On November 21 an Indian was named Secretary of the IMF, according to Press Trust of India:

“With a proven track record in managing complex work programmes, Indian economist Siddharth Tiwari has been named as the Secretary of the IMF by its Managing Director Dominique Strauss-Kahn.

Tiwari, currently Director of the Office of Budget and Planning, is set to assume the position, which was held by Shailendra Anjaria before his retirement from the IMF earlier this year.

“Mr Tiwari has the experience and skills” to promote consensus building, which is a critical goal of the IMF Board and Management, Strauss-Kahn said in a statement.”